My girlfriend from the Philipines arrived in the US as a teacher in 2008. She was lead to believe that she fell under exempt tax status for the first 2 years. The IRS has since come back and stated that she owes back taxes for those years. The penalties, interest and original taxes owed is ~$8,500.

quote:A TEACHER on H1-B visa, working on his second year in the US, recently dropped by at my office asking if I could prepare his exemption from tax payments under the US-Philippines tax treaty program.

The treaty provides that exempt individuals include teachers, trainees and students with either F, J, M or Q visas who substantially comply with their visa requirements. This, however, is limited to the first two years of the visa. Among Filipinos, those teachers holding J1 visas qualify for the tax exemption. It is essential to note though that the IRS Code requires that the educational institution the visa holder works for is a “qualified educational institution.” A local Montessori or other private school might not be considered a “qualified educational institution” though most universities and colleges, and even unified school districts are.

In addition to the tax exemption, the teacher or student becomes eligible for the Medicare and Social Security taxes abatement, if such taxes were withheld from their paychecks, as both the Internal Revenue Code and the Social Security Act allow an exemption to international students and teachers who have entered the United States on F-1 or J-1 status and who are still classified as non-resident aliens under the residency rules of the Internal Revenue Code.

But will a teacher on H1B visa qualify for tax treaty, Medicare and Social Security tax exemptions?

NO. The H-1B is an employment visa which is normally issued to individuals who seek temporary entry in a specialty occupation as a professional. It is normally restricted to persons who have a bachelor degree (or the equivalent in work experience).

The H-1B visa holder who has been in the United States for the entire tax year (in other words, you entered the US on your H-1B visa prior to January 1, 2009) is considered a resident alien for tax purposes while the alien with F, J, M or Q visas is legally considered “not in the US” when they come here, someone not subject to the substantial presence test.

The H1-B visitor will pay taxes at the state and federal level at the same tax rates as US citizens, and are liable to pay Social Security and Medicare taxes. He can claim all the exemptions and credits which are available to US citizens, to include filing jointly with his spouse (even if he/she is living in another country) and claiming the exemptions for his children (assuming the children lived with you in the US for more than half of the year). To file jointly with his spouse and/or to claim the exemptions for his children, he must either apply for and receive valid Social Security numbers for them or request Individual Tax Identification Numbers (ITIN).

It seems the fines and interest should be paid back at a minimum as well as whatever fee he charged? What should we do?

Your first step should be to contact the person who prepared the tax returns and ask them to defend their work product. Your girlfriend relied on that person's professional advice, and that person should be willing to argue your case before the IRS. If that person will not, then seek the assistance of a CPA or tax attorney. You should be able to resolve the matter with some routine correspondence if your girlfriend worked for a qualified educational institution.

I'm surprised the IRS is questioning a return if the Form 8833 was properly completed. It is pretty easy to determine if an H-1B Visa was issued, and your girlfriend should have received a W-2 indicating who she was working for. Those two documents should prove her eligibility for the treaty exemption.

The Tax Court recently held in a group of related cases that nonresident alien teachers were not entitled to a treaty-based income exemption for their wages earned in the United States as participants in an exchange teacher program. In each case, the Tax Court concluded that the teachers did not qualify for the exemption provided under Article 21 of the of the U.S.-Philippines income tax convention (Convention With Respect to Taxes on Income, U.S.--Phil., art. 21, Oct. 1, 1976, 34 U.S.T. 1277, 1976 U.S.T. LEXIS 487) based upon the facts and circumstances. The initial case in the group was Santos v. Commissioner, 2010 U.S. Tax Ct. LEXIS 38 (T.C. Oct. 18, 2010). [See also Ucol-Cobaria v. Comm'r, 2010 Tax Ct. Summary LEXIS 179 (T.C. 2010); Pagarigan v. Comm'r, 2010 Tax Ct. Summary LEXIS 185 (T.C. 2010); Samaco v. Comm'r, 2010 Tax Ct. Summary LEXIS 184 (T.C. 2010); Abiog v. Comm'r, 2010 Tax Ct. Summary LEXIS 186 (T.C. 2010" target="_blank" rel="nofollow">. In Santos and the other cases, the taxpayers came to the United States as part of an international teacher exchange program sponsored and regulated by the U.S. Department of State and operated by the Amity Institute, a non-profit organization. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 2. Teachers accepted into the program are expected by Amity to teach in the United States for a period of three years. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 2. The taxpayer in Santos was hired by a school district in California and signed a one-year contract for the 2004-2005 school year. After the expiration of that contract, the taxpayer signed a second one-year contract for the 2005-2006 school year, and prior to the expiration of the second contract, the taxpayer then signed a one-year contract for the 2006-2007 school year. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 9. During the period of her employment, the taxpayer worked under a J-1 visa sponsored by the Amity Institute. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 10. As part of her 2005 and 2006 Federal income tax returns, the taxpayer requested refunds claiming that her income during those years was exempt from taxation under article 21 of the convention. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 13, 14. The IRS issued the taxpayer notices of deficiency for the 2005 and 2006 tax years on the basis that she did not qualify for the exemption under the convention. Santos, 2010 U.S. Tax Ct. LEXIS 38, * at 14.

The Tax Court agreed, concluding that the taxpayer did not qualify for the exemption because she had failed to meet one of the five requirements for the exemption under the convention. The court stated that under article 21, the taxpayer had to meet the following requirements in order for the exemption to apply: "(1) She was a resident of the Philippines before coming to the United States; (2) she was invited by the Government or a recognized educational institution within the United States; (3) she was invited for a period not expected to exceed 2 years; (4) she was invited for the purpose of teaching or engaging in research at the recognized educational institution; and (5) she did in fact come to the United States primarily to carry out the purpose of the invitation." Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 17. The court held that the taxpayer had established all of the requirements except the requirement that she was invited "for a period not expected to exceed 2 years". Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 18. The court determined that the taxpayer was a nonresident alien individual under IRC Section 7701(b) [See Lexis TAFCR Explanation IRC § 7701(b); Lexis TAFT § 4B:1.07 (Substantial Presence Test" target="_blank" rel="nofollow"> and that, generally, under IRC Section 871(b), a nonresident alien individual who is engaged in a trade or business within the United States will be taxed on the taxable income effectively connected with that trade or business. Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFCR Explanation IRC § 871(b); Lexis TAFT § 4B:2.02 (Taxation of Individuals and Partnerships" target="_blank" rel="nofollow">.

The court further determined that the performance of personal services within the United States at any time during the taxable year was generally included under the phrase "trade or business within the United States" under IRC Section 864(b). Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFCR Explanation IRC § 864(b); Lexis TAFT § 4B:6.03 ("Trade or Business" Defined" target="_blank" rel="nofollow"> and that under Section 1.864-4(c)(6)(ii) "[c]ompensation paid to a nonresident alien in exchange for the performance of services in the United States constitutes income that is effectively connected to the conduct of a trade or business of the United States." Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15. [See Lexis TAFT § 4B:6.02 (The Concept of "Effectively Connected"" target="_blank" rel="nofollow">. The court concluded that based on these provisions, the taxpayer's wages would typically be considered taxable income but that under IRC Section 894(a), "the provisions of the Code will be applied to any taxpayer with due regard to any treaty obligations of the United States that apply" and that, therefore, the taxpayer's income could be "altered by treaty provisions". Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 15, 16. [See Lexis TAFT § 4B:6.02]. The court considered the IRS's contention that the taxpayer had failed to establish that she was invited to come to the United States "for a period not expected to exceed 2 years" and that relevant to deciding this issue was the expectation of the invitor, and the court considered the taxpayer's contention that the only relevant expectation was that of the invitee, the taxpayer, which could be demonstrated through her testimony and the circumstances of her situation. See Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 18, 19. The court concluded that the language of the convention was ambiguous with respect to the issue of whose expectation was relevant and proceeded to look at the facts and circumstances of the case in order to "make an objective determination" as to whether the taxpayer was invited to come to the United States "for a period not expected to exceed 2 years". See Santos, 2010 U.S. Tax Ct. LEXIS 38,* at 19.

My thinking is the woman at H&R block was wrong and my girlfriend should have never fallen under the treaty because of requirement 3. (Over 200 Teachers in Baton Rouge were told to file this way) Still, she goes to a tax professional for expert advice and they were wrong. I don't believe the 8833 form was ever properly filled out right or even filled out. I believe she never fell under the treaty anyway. She is one of 4-5 Filipinos going through this mess.

The lady at H&R who signed off on the tax forms in '09 told us to call the IRS and find out what documents were missing. We can't get a call back from the IRS to save our life. We ended up going to a woman (not H&R) that services many Filipinos in Baton Rouge. She tells me that all her returns need to be amended and that she didn't fall under Article 21 because she always intended to stay more than 2 years.

quote:The court considered the IRS's contention that the taxpayer had failed to establish that she was invited to come to the United States "for a period not expected to exceed 2 years" and that relevant to deciding this issue was the expectation of the invitor, and the court considered the taxpayer's contention that the only relevant expectation was that of the invitee, the taxpayer, which could be demonstrated through her testimony and the circumstances of her situation.

I would have taken issue with this. The fact that the invitor executed a one year teaching contract effectively limited their expectation to the lenghth of the contract as an act of law. There was no guarantee of renewal. Any subsequent contract would have been an alteration of expectation.

And for the record, tax court decisions are not always authority for other taxpayers. The IRS ignores them all the time.

quote:I would have taken issue with this. The fact that the invitor executed a one year teaching contract effectively limited their expectation to the lenghth of the contract as an act of law. There was no guarantee of renewal. Any subsequent contract would have been an alteration of expectation.

Listen to this, my girlfriend had a 1 year school contract and 1 year visa. The visa was from July 13, 2008 to June 30, 2009 and she was denied when she refiled for her H1 visa extension. She hired a lawyer to appeal the denial and had to go back to the Philipines in January 31, 2010 (20 days) where she recieved a 6 month extension starting February 20, 2010 until July 30, 2010.

She found out that summer that the school board would offer another year of teaching. To her amazement she hired an attorney and received a 3 year extension on her visa. I mean, she honestly believed the gig was up on July 31, 2010 which made just 2 years.

quote:And for the record, tax court decisions are not always authority for other taxpayers. The IRS ignores them all the time.

I had no idea but should have figured the IRS gives no fricks about the law

It souds like your facts and circumstances clearly distinguish your girlfriend's case from the decision you cited. The fact that the visa was for 1 year removes any doubt as to the expectation of staying more than one year on the original invitation. And not even the IRS can change facts.